UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
August 28, 1985
THOMAS A. GRAHAM AND ELIZABETH GRAHAM
COMMISSIONER OF INTERNAL REVENUE. MERIDIAN ENGINEERING, INC. OF PENNSYLVANIA V. COMMISSIONER OF INTERNAL REVENUE. THOMAS A. GRAHAM; ELIZABETH GRAHAM, AND MERIDIAN ENGINEERING, INC. OF PENNSYLVANIA, APPELLANTS
On Appeal from the United States Tax Court (Tax Court Docket Nos. 7603-80, 7604-80)
Before: GARTH, BECKER, ROSENN, Circuit Judges.
Opinion OF THE COURT
BECKER, Circuit Judge.
This appeal from a judgment of the United States Tax Court raises a number of questions concerning use by the Internal Revenue Service of information obtained from grand jury materials by means of a Fed. R. Crim. P. 6(e) order that would now be invalid under the Supreme Court's decision in United States v. Baggot, 463 U.S. 476, 103 S. Ct. 3164, 77 L. Ed. 2d 785 (1983). This information forms the basis for statutory notices of tax deficiency that were challenged by appellants Thomas A. Graham ("Graham") and Meridian Engineering, Inc. ("Meridian") in proceedings before the Tax Court.
In Gluck v. United States, 771 F.2d 750 consolidated with this case for disposition and decided today, we held that IRS summonses issued on the basis of information obtained by means of similar Rule 6(e) order are enforceable because the IRS agents who obtained the information acted in good faith reliance on that order, which was issued by a United States District Court and was valid on its face. We concluded that, under such circumstances, enforcement of the summonses would not constitute an abuse of the court's process.
Although this case arises out of proceedings to determine deficiencies in the Tax Court, while Gluck involved the enforcement of summonses in the district court, we hold that this difference in procedural posture is inconsequential and that our decision in Gluck dictates the outcome here, whether the IRS agents also acted in good faith reliance on a facially valid Rule 6(e) order. We thus hold that the information obtained by these IRS agents from grant jury materials properly forms the basis of the challenged deficiency notices, and we will affirm the judgment in favor of the IRS for the amounts stated therein.*fn1
In September 1971, a federal grand jury sitting in the Eastern District of Pennsylvania began an investigation into contracts between several commercial vendors and the City of Philadelphia. On October 4, 1971, the United States Attorney filed an ex parte motion in the district court for an order, pursuant to Fed. R. Crim. P. 6(e).*fn2 seeking authorization to disclose to agents of the IRS matters occuring before the grand jury so that the agents could lend their technical assistance to the investigation.*fn3 On the same day, the district court entered an order granting the motion. The order stated, in part:
the United States Attorney and Special Attorneys of the United States Department of Justice are authorized to utilize the assistance of agents, special agents and employees of the Internal Revenue Service in this Grand Jury Investigation, Yand may give access to such persons of books, records, documents and transcripts of testimony before the Grand Jury in this investigation, and the said agents, special agents, and employees shall not be prohibited from utilizing such material in the course of their official duties, for either criminal or civil purposes, provided the the subpoenaed material shall remain at all times under the aegis of attorneys for the government.
On January 15, 1973, the grand jury issued a subpoena directing Meridian to produce all business records relating to its tax liability for calendar or fiscal years ending 1969, 1970, and 1971. Meridian complied with this subpoena by handing over the requested documents. On October 25, 1973, after the original grand jury's term expired, a new federal grand jury was convened in Philadelphia to continue the investigation. Once again the United states Attorney moved for a Rule 6(e) order, and such an order was entered by the district court on November 20, 1973. This Rule 6(e) order, like the earlier one, explicitly stated that the IRS agents lending assistance to the Justice Department investigation could use information obtained from subpoenaed materials for civil matters, so long as these materials remained under the aegis of the attorneys for the government.
On April 4, 1974, Graham, president, chairman of the board, and principal shareholder of Meridian, testified before the grand jury under a grant of immunity. On April 24, he was subpoenaed to produce all his bank account records for the years 1969 through 1973, and his diaries and appointment books for the year 1973. Graham moved in the district court to quash the subpoena or for a protective order prohibiting access to these records for civil use by IRS personnel. The government countered that the appropriate time to challenge civil use of the grand jury materials would be when the materials were put to such use, if ever, and that civil use of grand jury materials is permitted by Rule 6(e). Graham's motion was denied by the district court on June 3, 1974, and he complied with the subpoena.
On February 20, 1980, the IRS mailed to Meridian and Graham formal statutory notices of income tax deficiency for the years 1969 through 1972. The primary adjustments related to amounts alleged to have been personal expenses of Graham that were paid by Meridian. The IRS included these amounts in Graham's income as dividends, and also disallowed them as business deductions to Meridian. The Service based its determination of deficiencies on information obtained from the grant jury materials by means of the Rule 6(e) orders discussed above.
On May 21, 1980, the taxpayers (Meridian and Graham) petitioned the Tax Court for a redetermination of the deficiencies pursuant to 26 U.S.C. § 6213. The parties stipulated to the relevant facts and filed a joint motion under Tax Court Rule 122 to submit the cases for consideration without trial.*fn4 Appendix for Appellants at 47a. In their brief in support of the petition for redetermination, the taxpayers argued that the IRS obtained the information upon which it based the statutory notices of deficiency in violation of grand jury secrecy, and that this required invalidation of the notices and dismissal of the action. Alternatively, the taxpayers argued that the tax court should afford the relief granted in Cohen v. Commissioner.*fn5 The IRS countered that its use of grand jury materials pursuant to Rule 6(e) orders was not improper, and that, in any case, invalidation of notices of deficiency is not an appropriate remedy for any underlying abuse of grand jury secrecy by the agency. Furthermore, the IRS contended, since the taxpayers had stipulated that the amounts in the notices of deficiency were "uncontested," the Tax Court could enter judgment in favor of the IRS on that basis alone.
While the case was pending before the Tax Court, the Supreme Court issued its decision in United States v. Baggot, 463 U.S. 476, 103 S. Ct. 3164, 77 L. Ed. 2d 785 (1983). In Baggot, the Court interpreted Rule 6(e) as not permitting access by IRS agents to grand jury materials for the purpose of preparing civil tax liabilities. In light of the Baggot decision, the tax court ordered supplemental briefing by the parties. The taxpayers argued that Baggot should be applied retroactively to invalidate the Rule 6(e) orders that led to the information upon which the notices of deficiency were based, and that the notices should therefore be struck down as the fruits of illegally obtained evidence. The IRS, while admitting that the Rule 6(e) orders would be invalid if issued after Baggot, contended that Baggot should not be given retroactive application.
In a decision adopted by the entire court. Graham v. Commissioner of Internal Revenue, 82 T.C. 299 (1984), the Tax Court found in favor of the IRS on a very narrow ground. The court assumed the illegality of the IRS's use of grand jury materials but held that Graham and Meridian had requested an inappropriate remedy -- invalidation of the statutory notices of deficiency.*fn6 Having determined in this manner that the notices were immune from the taxpayers' challenge, the court, taking notice of the above-mentioned stipulations, see supra note 4, entered judgment in favor of the IRS for the amounts stated in the deficiency notices.*fn7 Graham and Meridian appeal, raising essentially the same contentions as they raised in the Tax Court.
As the above summary of the numerous opinions filed by the Tax Court makes clear, see supra typescript at 8-9 & n.7, this case raises a number of interesting and unresolved questions of law.*fn8 We need not address these issues in order to decide the case, however, for its outcome is dictated by our decision in the companion case of United States v. Gluck, 771 F.2d 750, In Gluck, we were confronted with a challenge to the enforcement of IRS summonses that were issued as a result of information obtained through a Rule 6(e) order of the kind subsequently declared invalid by the Supreme Court in Baggot. Reasoning that an IRS summons must be quashed only if its enforcement would constitute an abuse of the court's process, we concluded that the summonses in Gluck should not be quashed because the IRS agents who obtained the grand jury information had acted in good faith reliance upon a facially valid Rule 6(e) order. In reaching this conclusion, we relied in substantial part on two Supreme Court cases involving application of the exclusionary rule in the fourth amendment context, United States v. Peltier, 422 U.S. 531, 45 L. Ed. 2d 374, 95 S. Ct. 2313 (1975) and United States v. Leon, 468 U.S. 897, 104 S. Ct. 3405, 82 L. Ed. 2d 677 (1984).
In Peltier, the Court considered whether the exclusionary rule should be applied retroactively to suppress evidence from a warrantless border patrol search that would have been invalid under Almeida-Sanchez v. United States, 413 U.S. 266, 37 L. Ed. 2d 596, 93 S. Ct. 2535 (1973). The Court held that the evidence should not be suppressed because the officers reasonably believed in good faith that their search was legal under the state of the law as they found it. Thus, suppression of the evidence would neither promote judicial integrity nor deter future misconduct by law enforcement officials. See Peltier, 422 U.S. at 537-39. Similarly, the Leon Court held that evidence should not be suppressed in a criminal trial when law enforcement officials act in objective good faith reliance on a facially valid search warrant that is later declared invalid. Leon, 104 S. Ct. at 3421.
Given our decision in Gluck, even assuming that appellants could surmount every other legal obstacle standing in the way of relief from the judgment of the Tax Court, see supra note 8, we must hold in favor of the IRS. As in Gluck, the IRS agents who used grant jury information in this case acted in good faith reliance on facially valid Rule 6(e) orders issued by a United States District Court.*fn9 Under such circumstances, curative action with respect to the evidence obtained from the grand jury, such as suppressing its use as a basis for the notices of deficiencies, is necessary neither to preserve the judicial process, see Peltier, 422 U.S. at 536-38,*fn10 nor to deter future misconduct by IRS agents. See Leon, 104 S. Ct. at 3418-19. As we noted in Gluck, "these agents will . . . continue to act pursuant to facially valid court orders -- as indeed they should. Moreover, deterrence is unnecessary because Baggot forecloses access by the IRS to grand jury materials for the purpose of determining civil tax liabilities." Gluck, typescript at 20. The fact that the question on this appeal arises out of a tax court proceeding, rather than out of a district court summons enforcement proceeding, is thus an immaterial distinction with respect to the issue at hand.
The IRS agents who obtained the information that forms the basis of the notices of deficiency issued to Graham and Meridian did so in good faith reliance on facially valid Rule 6(e) orders issued by the district court. That information, therefore, may properly stand in support of those notices. Meridian and Graham have thus failed to prove that the notices should be declared invalid, or that they are "naked and without any foundation." Janis, 428 U.S. at 442 (emphasis in original). Furthermore, particularly in light of their stipulation that the amounts in the notices are uncontested, the taxpayers have failed to carry their burden of proving the amount of tax they are entitled to recover. Lewis v. Reynolds, 284 U.S. 281, 76 L. Ed. 293, 52 S. Ct. 145 (1932); Rule 142(a) of the Rules of Practice and Procedure of the United States Tax Court; see Janis, 428 U.S. at 440. Accordingly, we will affirm the judgment of the Tax Court in favor of the IRS for the amounts specified in the deficiency notices.